ANALYSIS-Texas oil sails to Canada, refiners fume over tanker law

NEW YORK/LONDON, May 1 (Reuters) - Oil traders including
commodities giant Trafigura and Australian bank Macquarie have
quietly begun shipping U.S. crude oil from Texas to Canada,
raising the ire of U.S. East Coast refiners who may pay four
times as much for a similar voyage.

In the latest oil trading trend to emerge from the
unexpected boom in U.S. shale production, the firms have hired
at least seven foreign-flagged tankers to run the route to
Canada this year, most of them for the first time, according to
market sources and data analyzed by Reuters.

U.S. refiners, however, are required by a shipping law from
1920 known as the Jones Act to use more costly U.S.-owned and
operated ships if they want to tap into the oil bounty emerging
from the Eagle Ford fields of Texas, highlighting the uneven
playing field that is taking shape in the Atlantic basin.

Although the law itself has long been a bone of contention
in the industry, the emergence in recent months of such a
prominent example of how the Jones Act "penalizes" domestic
firms is reopening old wounds, according to John Auers, senior
vice president of refinery consultants Turner, Mason & Co.

The trend was highlighted on Monday by U.S. government data
showing crude oil exports to Canada leapt to a 13-year high of
124,000 barrels per day, double rates from last year. Much of
that was in the form of shipments by rail, pipeline or barge,
which have been steadily rising for months.

But that data did not include details on the mode of
transport, masking the swift rise of seaborne traffic.

The latest such cargo is aboard the Everglades, which loaded
a 500,000-barrel cocktail of light, sweet crude in Nederland,
Texas late last week. The tanker, Macquarie's first
U.S.-to-Canada shipment, on Tuesday was rounding Florida en
route to the Come-by-Chance refinery in Newfoundland, which is
now run by South Korea's national oil company.

Others moved sooner. Suncor Energy, Canada's biggest
oil and gas producer, shipped one cargo to its refinery in
Montreal, Quebec in late February; privately held Irving Oil has
also imported some crude from the Gulf Coast to its plant in St.
John, New Brunswick, according to analysis of export data
gathered by port intelligence group PIERS.

While the exports to Canada are perfectly legal (provided
the exporter has a license from the U.S. Department of
Commerce), they are shining a spotlight on a vexing market
anomaly: one created not by gaps in energy infrastructure like
the pipeline shortages that made winners out of Midwest
refiners, but by a nearly century-old regulatory legacy.

"The refiners who happened to have plants in North Dakota or
Utah just got lucky, that's the free market," said Auers. "But
here's a federal law that basically rewards your foreign
competitors -- that's how the refiners look at it."

Pressure on lawmakers is building, particularly from firms
that also face higher costs moving U.S. fuel into the Northeast.

"I hear there is talk in Washington about modifying the
Jones Act," Joe Petrowski, chief executive of oil retail and
wholesale group Gulf Oil, said on CNBC last week. "If that
happens it would be very good news for the industry."

Refiners including Delta Air Lines unit Monroe
Energy, which bought a plant in New Jersey last year, and
Philadelphia Energy Solutions declined to comment. PBF Energy
and Phillips 66 report earnings this week.

COSTLIER GASOLINE

The Jones Act requires any voyage between U.S. ports to be
on a U.S.-flagged, built and manned vessels. Supporters say it
has protected U.S. maritime jobs since it was first introduced,
and supported prices for owners of U.S.-flagged vessels.

Only around three-dozen such tankers now exist, and most of
those are already busy on routine routes. That leaves little
spare capacity to exploit the new Gulf-to-East Coast voyage.

The average cost for a Jones Act compliant vessel to sail
from the Gulf Coast to the East Coast is around $70,000 a day,
according to shipping sources, almost four times the $16,000 a
day it costs for a foreign-flagged tanker sailing to
Newfoundland, scarcely a day's longer journey.

Although U.S. law bars exporting domestically produced crude
as a matter of course, the Commerce Department generally
approves special permits to sell crude to Canada - provided that
oil returns to the United States in the form of fuel.

That may only serve to infuriate East Coast refiners even
more, since they must directly compete with imported Canada-made
gasoline or diesel in the New York Harbor market.

At the margin, the higher cost of shipping crude to Canada
-- and then re-importing the product -- gets passed on to
motorists. Meanwhile U.S. East Coast refiners are either paying
higher freight rates, using costlier railway lines to bring in
North Dakota shale or importing crude from West Africa or Europe
at a premium of up to $15 a barrel to U.S. grades.

Gulf Oil's Petrowski said the law could be adding as much as
10 to 15 cents per gallon to the cost of gasoline by raising the
cost of shipping up Gulf Coast fuel.

Refiners can point to one recent precedent in calling for
relief: As the Northeast battled severe fuel supply disruptions
in the wake of Hurricane Sandy last October, the Department of
Homeland Security issued a blanket waiver of the Jones Act to
help increase deliveries into the region.

Over the next month more than 3.2 million barrels of
gasoline and diesel was shipped into the Northeast by a total of
nine companies, before the waiver expired.

Those waivers were critical in part because a half-dozen
refiners along the Atlantic coast have shuttered since 2008 due
largely to low margins, cutting the region's capacity by around
1.2 million bpd.

But opponents of the law were disappointed last month when
the U.S. Government Accountability Office issued a long-awaited
report on the impact of the Act on Puerto Rico, saying the
benefits of modifying the law were "uncertain".

TRAFIGURA LEADS THE CHARGE

Tanker brokers say at least seven such shipments have been
booked on the spot market so far this year, up from less than
half a dozen in all of 2012.

The leading shipper so far has been international commodity
giant Trafigura, which shipped two such cargoes to
Canada at the start of this year from a converted oil terminal
in Corpus Christi, Texas, to Come by Chance, according to the
PIERS data, which was made available to Reuters.

Trafigura has stolen a lead on shipping seaborne crude from
the Eagle Ford development since buying the Texas Dock & Rail
storage terminal last year, giving it rail and truck offloading
facilities and a deep tanker loading facility.

Production from Eagle Ford has more than trebled since 2011
to reach almost 470,000 bpd in the first two months of the year,
according to state data released this month.

Trafigura declined to comment on specific shipments, but
said the firm has a Department of Commerce license to export
crude from the United States to Canada.

Others are also involved. Royal Dutch Shell shipped
crude last November from Louisiana to St John, according to the
PIERS data. Irving Oil has also been importing North Dakota
crude by smaller tankers from Albany, New York.

And Macquarie is also now getting into the business
directly, hiring its own ship to deliver U.S. crude to Come by
Chance. The Australian bank, a growing player in the physical
oil market, has a deal to supply crude and export fuel from the
refinery, owned by Korea National Oil Corp (KNOC) subsidiary
Harvest Energy.

Foreign firms aren't the only ones benefiting from the
trade, however. Valero, the largest independent refiner
in North America, processed its first cargo of Eagle Ford crude
at its Quebec refinery in April.

Although the cost of the crude was comparable to other
sources, the refinery yield was "better than what we had
anticipated," Valero Chairman Bill Klesse told analysts on
Tuesday. Valero's export license allows it to ship as much as
90,000 bpd of U.S. crude to Canada, and the firm hopes to run
exclusively North American crude in all its plants within a
year.

And for the moment Valero has little reason to complain
about the Jones Act: Klesse sold his last refinery on the U.S.
East Coast three years ago.
(Additional reporting by Jonathan Saul in London; Editing by
Leslie Gevirtz)